Google's optimistic note shouldn't give way to spending splurge

Google should think twice about an investment binge.

By Robert Cyran

6:01AM BST 16 Oct 2009

The US search giant thinks the recession bottomed in the third quarter. So now, according to chief executive Eric Schmidt, it’s ready to “invest heavily” in its business. Google’s economic forecast is optimistic. Applied to its try-anything investment style, it could also be dangerous for shareholders.

Sure, the company is doing well. Even though Google is heavily dependent upon the highly cyclical advertising market, revenues still grew 8pc compared to the same period last year. And the company’s recent focus on keeping costs in check resulted in earnings rising 26pc. This discipline extended to capital expenditure, which is down about 70pc from its peak.

No one would begrudge a bit of an increase in costs and capital expenditure. The firm has been able to use its servers more efficiently over the past year, for example, though better use of software. But at a certain point, Google needs to replace equipment or buy more of it as the business grows.

Yet Google has a record of investing heavily in things quite distant from its core business. Projects in space, health, and green power are interesting and even inspirational. It is more difficult to see the benefit to Google shareholders.

Moreover, Google says investors shouldn’t expect it to use its $22bn (and growing) cash pile for extraordinary buybacks or dividends “anytime soon”. Unfortunately, such huge sums tend to burn holes in corporate pockets. Investors should hold the company to its more recent bout of fiscal discipline.